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(Exact name of registrant as specified in its charter)
Delaware
38-1612444
(State of organization)
(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (313) 322-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þYes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
Notes and accounts receivable from affiliated companies
1,190
1,090
Derivative financial instruments (Note 11)
1,528
1,862
Other assets (Note 7)
3,759
4,100
Total assets
$
115,555
$
117,344
LIABILITIES AND SHAREHOLDER’S INTEREST
Liabilities
Accounts payable
Customer deposits, dealer reserves and other
$
1,126
$
1,082
Affiliated companies
1,758
1,145
Total accounts payable
2,884
2,227
Debt (Note 8)
94,235
96,333
Deferred income taxes
1,722
1,816
Derivative financial instruments (Note 11)
1,071
1,179
Other liabilities and deferred income (Note 7)
4,808
4,809
Total liabilities
104,720
106,364
Shareholder’s interest
Shareholder’s interest
5,149
5,149
Accumulated other comprehensive income
879
1,052
Retained earnings (Note 9)
4,807
4,779
Total shareholder’s interest
10,835
10,980
Total liabilities and shareholder’s interest
$
115,555
$
117,344
The following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”). These assets and liabilities are included in the consolidated balance sheet above. See Notes 5 and 6 for additional information on our VIEs:
Adjustments to reconcile net income to net cash provided by operations
Provision for credit losses
(51
)
385
Depreciation and amortization
748
1,587
Amortization of upfront interest supplements
(445
)
(382
)
Net change in deferred income taxes
(87
)
(293
)
Net change in other assets
524
809
Net change in other liabilities
900
(85
)
All other operating activities
(12
)
18
Net cash provided by operating activities
2,105
2,026
Cash flows from investing activities
Purchases of finance receivables (other than wholesale)
(5,549
)
(4,910
)
Collections of finance receivables (other than wholesale)
7,418
8,219
Purchases of operating lease vehicles
(1,226
)
(910
)
Liquidations of operating lease vehicles
1,959
1,626
Net change in wholesale receivables
541
4,484
Net change in notes receivable from affiliated companies
(4
)
93
Purchases of marketable securities
(9,239
)
(5,544
)
Proceeds from sales and maturities of marketable securities
6,284
5,854
Proceeds from sales of businesses
—
165
Settlements of derivatives
174
914
All other investing activities
(77
)
(24
)
Net cash provided by investing activities
281
9,967
Cash flows from financing activities
Proceeds from issuances of long-term debt
8,767
5,272
Principal payments on long-term debt
(8,824
)
(15,214
)
Change in short-term debt, net
(1,136
)
(4,049
)
Cash distributions (a)
(500
)
—
All other financing activities
(36
)
(15
)
Net cash used in financing activities
(1,729
)
(14,006
)
Effect of exchange rate changes on cash and cash equivalents
(176
)
(192
)
Cumulative correction of a prior period error (b)
—
(630
)
Total cash flows from continuing operations
481
(2,835
)
Cash and cash equivalents, beginning of period
$
10,882
$
15,473
Change in cash and cash equivalents
481
(2,835
)
Cash and cash equivalents, end of period
$
11,363
$
12,638
(a)
See Note 9 for information regarding $1.1 billion of non-cash distributions in the first quarter of 2009.
(b)
In the first quarter of 2009, we recorded a $630 million cumulative adjustment to correct for the overstatement of cash and cash equivalents and certain accounts payable that originated in prior periods. The impact on previously issued annual and interim financial statements was not material.
The accompanying notes are an integral part of the financial statements.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited financial statements include all adjustments considered necessary for a fair statement of the results of operations and financial conditions for interim periods for Ford Motor Credit Company LLC, its consolidated subsidiaries and consolidated VIEs in which Ford Motor Credit Company LLC is the primary beneficiary (collectively referred to herein as “Ford Credit”, “we”, “our” or “us”). Results for interim periods should not be considered indicative of results for any other interim period
or for the full year. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 10-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”).
We reclassified certain prior year amounts in our consolidated financial statements to conform to current year presentation.
Interest Supplements and Other Support Costs Earned from Affiliated Companies
As of January 1, 2008, to reduce ongoing obligations to us and to be consistent with general industry practice, Ford began paying interest supplements and residual value support to us at the time we purchase eligible contracts from dealers. Finance receivables are reported at their outstanding balance, including origination cost and late charges, net of unearned income and unearned interest supplements received from Ford and other affiliates. The amount of unearned interest supplements for finance receivables was $2.0 billion and $1.9 billion at March 31, 2010 and December 31, 2009, respectively. Net investment in operating leases are recorded at cost and the vehicles are depreciated on
a straight-line basis over the lease term to the estimated residual value. Unearned interest supplements and residual support payments received from Ford and other affiliates for investments in operating leases are recorded in Other liabilities and deferred income. The amount of unearned interest supplements and residual support payments for net investment in operating leases was $1.0 billion and $1.1 billion at March 31, 2010 and December 31, 2009, respectively.
At March 31, 2010, in the United States and Canada, Ford is obligated to pay us about $730 million of interest supplements (including supplements related to sold receivables) and about $140 million of residual value support over the terms of the related finance contracts, compared with $1.0 billion of interest supplements and $180 million of residual value support at December 31, 2009, in each case for contracts purchased prior to January 1, 2008. The unpaid interest supplements and residual value support obligations on these contracts
will continue to decline as the contracts liquidate.
Provision for/(Benefit from) Income Taxes
The provision for/(benefit from) income taxes is computed by applying our estimated annual effective tax rate to year-to-date income/(loss) before taxes. The unusual first quarter 2009 effective tax rate resulted primarily from the impact of first quarter adjustments to prior year estimates of state and local income taxes relative to our financial results.
We offer a wide variety of automotive financing products to and through automotive dealers throughout the world. Our finance receivables fall into three categories:
•
Retail financing — purchasing retail installment sale and direct financing lease contracts from dealers for new and used vehicles with retail customers, daily rental companies, government entities, and fleet customers;
•
Wholesale financing — making loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing; and
•
Other financing — making loans to dealers for improvements to dealership facilities, working capital, and the purchase and financing of dealership real estate. Other financing also includes purchasing certain receivables generated by Ford, primarily in connection with the delivery of vehicle inventories from Ford, the sale of parts and accessories by Ford to dealers and other receivables generated by Ford.
Total finance receivables, net of unearned income (a)(b)
77,755
81,235
Less: Unearned interest supplements
(1,986
)
(1,932
)
Less: Allowance for credit losses
(1,180
)
(1,335
)
Finance receivables, net
$
74,589
$
77,968
Net finance receivables subject to fair value (c)
$
72,552
$
75,584
Fair value
73,924
76,807
(a)
At March 31, 2010 and December 31, 2009, includes $637 million and $647 million, respectively, of primarily wholesale receivables with entities that are reported as consolidated subsidiaries of Ford. The consolidated subsidiaries include dealerships that are partially owned by Ford and consolidated as VIEs and also certain overseas affiliates. The associated vehicles that are being financed by us are reported as inventory on Ford’s balance sheet.
(b)
At March 31, 2010 and December 31, 2009, includes finance receivables before allowance for credit losses of $59.8 billion and $64.4 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be included in our consolidated financial statements, of which $123 million is reported as inventory by Ford at March 31, 2010. The receivables are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions. Refer to Note 5 for additional information.
(c)
At March 31, 2010 and December 31, 2009, excludes $2.0 billion and $2.4 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements. See Note 10 for fair value methodology.
Net investment in operating leases consists primarily of lease contracts for new and used vehicles with retail customers, daily rental companies, government entities and fleet customers with terms of 60 months or less.
At March 31, 2010 and December 31, 2009, includes net investment in operating leases before allowance for credit losses of $10.9 billion and $10.4 billion, respectively, that have been included in securitization transactions but continue to be included in our consolidated financial statements. These net investment in operating leases are available only for payment of the debt or other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors until the associated debt or other obligations are satisfied. Refer to Note 5 for additional information.
The allowance for credit losses is our estimate of the probable credit losses inherent in finance receivables and operating leases at the date of the balance sheet. Consistent with our normal practices and policies, we assess the adequacy of our allowance for credit losses quarterly and regularly evaluate the assumptions and models used in establishing the allowance. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain.
Allowance for Credit Losses
Following is an analysis of the allowance for credit losses related to finance receivables, investment in direct financing leases, and investment in operating leases for the periods ended March 31 (in millions):
First Quarter
2010
2009
Balance, beginning of period
$
1,549
$
1,668
Provision for credit losses
(51
)
385
Total charge-offs and recoveries
Charge-offs
(250
)
(436
)
Recoveries
117
104
Net charge-offs
(133
)
(332
)
Other changes, principally amounts related to translation adjustments
(9
)
(9
)
Balance, end of period
$
1,356
$
1,712
The allowance for credit losses is estimated using a combination of models and management judgment, and is based on such factors as portfolio quality, historical loss performance, and receivable levels. At March 31, 2010, our allowance for credit losses included about $95 million for management’s judgment regarding higher retail installment and lease repossession assumptions compared with historical trends used in our models. At March 31, 2009, our allowance for credit losses included about $160 million for management’s judgment regarding higher severity assumptions and higher wholesale and dealer loan losses.
We securitize finance receivables and net investment in operating leases through a variety of programs, utilizing amortizing, variable funding and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to many different investors in both public and private transactions in capital markets worldwide.
We adopted the Financial Accounting Standards Board’s (“FASB”) new accounting standard related to transfers of financial assets on January 1, 2010. The standard provides greater transparency about transfers of financial assets and a company's continuing involvement in the transferred financial assets. The standard also removes the concept of a qualifying special-purpose entity from GAAP and changes the requirements for derecognizing financial assets. This new standard did not have a material impact on our financial condition, results of operations and financial statement disclosures.
We transfer finance receivables and net investments in operating leases in securitization transactions to fund operations and to maintain liquidity. The majority of our securitization transactions are recorded as asset-backed debt and the associated assets are not derecognized and continue to be included in our financial statements.
The finance receivables and net investment in operating leases that have been included in securitization transactions are only available for payment of the debt and other obligations issued or arising in the securitization transactions. Cash and cash equivalents and marketable securities balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions. The asset-backed debt has been issued either directly by us or by consolidated entities.
Most of these securitization transactions utilize VIEs. Refer to Note 6 for more information concerning VIEs. The following table shows the assets and the liabilities related to our securitization transactions that were included in our financial statements at March 31, 2010 and December 31, 2009 (in billions):
Cash and Cash Equivalents and Marketable Securities (a)
Finance Receivables & Net Investment in Operating Leases
Related Debt
Before Allowance
for Credit Losses
Allowance for
Credit Losses
After Allowance
for Credit Losses
VIE (b)
Retail
$
3.4
$
38.9
$
0.7
$
38.2
$
30.6
Wholesale
0.5
15.8
0.0
15.8
10.2
Finance receivables
3.9
54.7
0.7
54.0
40.8
Net investment in operating leases
1.2
10.9
0.1
10.8
7.1
Total
$
5.1
$
65.6
$
0.8
$
64.8
$
47.9
Non-VIE
Retail
$
0.5
$
2.5
$
0.0
$
2.5
$
2.8
Wholesale
0.0
2.6
0.0
2.6
2.0
Finance receivables
0.5
5.1
0.0
5.1
4.8
Net investment in operating leases
—
—
—
—
—
Total (c)
$
0.5
$
5.1
$
0.0
$
5.1
$
4.8
Total securitization transactions
Retail
$
3.9
$
41.4
$
0.7
$
40.7
$
33.4
Wholesale
0.5
18.4
0.0
18.4
12.2
Finance receivables
4.4
59.8
0.7
59.1
45.6
Net investment in operating leases
1.2
10.9
0.1
10.8
7.1
Total
$
5.6
$
70.7
$
0.8
$
69.9
$
52.7
(a)
Includes marketable securities totaling $256 million, which are pledged as collateral in a funding arrangement with the European Central Bank (“ECB”).
(b)
Includes assets to be used to settle the liabilities of the consolidated VIEs.
(c)
Certain debt issued by the VIEs to affiliated companies served as collateral for accessing the ECB open market operations program. This external funding of $736 million at March 31, 2010 was not reflected as debt of the VIEs and is reflected as non-VIE debt above. The finance receivables backing this external funding are reflected in VIE finance receivables.
Finance Receivables & Net Investment in Operating Leases
Related Debt
Before Allowance
for Credit Losses
Allowance for
Credit Losses
After Allowance
for Credit Losses
VIE (a)
Retail
$
3.1
$
41.7
$
0.8
$
40.9
$
31.2
Wholesale
0.5
16.5
0.0
16.5
8.4
Finance receivables
3.6
58.2
0.8
57.4
39.6
Net investment in operating leases
1.3
10.4
0.2
10.2
6.6
Total
$
4.9
$
68.6
$
1.0
$
67.6
$
46.2
Non-VIE
Retail
$
0.3
$
3.2
$
0.1
$
3.1
$
4.5
Wholesale
0.0
3.0
0.0
3.0
2.2
Finance receivables
0.3
6.2
0.1
6.1
6.7
Net investment in operating leases
—
—
—
—
—
Total (b)
$
0.3
$
6.2
$
0.1
$
6.1
$
6.7
Total securitization transactions
Retail
$
3.4
$
44.9
$
0.9
$
44.0
$
35.7
Wholesale
0.5
19.5
0.0
19.5
10.6
Finance receivables
3.9
64.4
0.9
63.5
46.3
Net investment in operating leases
1.3
10.4
0.2
10.2
6.6
Total
$
5.2
$
74.8
$
1.1
$
73.7
$
52.9
(a)
Includes assets to be used to settle the liabilities of the consolidated VIEs.
(b)
Certain debt issued by the VIEs to affiliated companies served as collateral for accessing the ECB open market operations program. This external funding of $1.8 billion at December 31, 2009 was not reflected as debt of the VIEs and is reflected as non-VIE debt above. The finance receivables backing this external funding are reflected in VIE finance receivables.
The financial performance related to our securitization transactions for the periods ended March 31 were as follows (in millions):
Many of our securitization entities enter into derivative transactions to mitigate interest rate exposure, primarily resulting from fixed-rate assets securing floating-rate debt and in certain instances, currency exposure resulting from assets in one currency and debt in another currency. Refer to Note 10 regarding the fair value of derivatives. In many instances, the counterparty enters into offsetting derivative transactions with us to mitigate their interest rate risk resulting from derivatives with our securitization entities. Our exposures based on the fair value of derivative instruments related to securitization programs at March 31, 2010 and December 31, 2009 were as follows (in millions):
We recognized investment and other income of $10 million in the first quarter of 2009 related to the sales of receivables; the amount recognized in the first quarter of 2010 was de minimis. The amount is included in Other income, net. Also, we received cash flows of $14 million and $6 million in the first quarter of 2010 and 2009, respectively, related to the net change in retained interests in securitized assets. These amounts are included in All other investing activities in our consolidated statement of cash flows.
We adopted the FASB’s new accounting standard on VIEs on January 1, 2010. The standard requires ongoing assessments of whether an entity is the primary beneficiary of a VIE, and enhances the disclosures about an entity's involvement with a VIE. This standard requires the consolidation of a VIE if an entity has both (i) the power to direct the activities of the VIE, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the VIE. This new standard did not result in any deconsolidation of entities or additional consolidation of entities.
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. Nearly all of our VIEs are special purpose entities used for most of our on-balance sheet securitizations.
If we determine that we have operating power within the entity and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate. Our involvement constitutes power that is most significant to the entity when we have unconstrained decision making ability within the entity over key operational functions. Examples of significant involvements in our securitization entities that constitute power include our ability to exercise discretion in the servicing of financial assets, our ability to issue additional debt, our ability to exercise a unilateral call option, our ability to add assets to revolving structures, and our ability to control the investment decisions.
Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.
VIEs of which we are the primary beneficiary
We use VIEs to issue asset-backed securities in transactions to public and private investors, bank conduits and government-sponsored entities or others who obtain funding from government programs. The asset-backed securities are secured by finance receivables and interests in net investments in operating leases. We retain interests in our securitization transactions, including senior and subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, such as cash reserves, and residual interests. Therefore, the assets continue to be consolidated by us.
The VIE transactions create and pass along risks to the variable interest holders, depending on the assets securing the debt and the specific terms of the transactions.
We aggregate and analyze our transactions based on the risk profile of the product and the type of funding structure, including:
•
Retail transactions — consumer credit risk and prepayment risk, which are driven by the ability of the customer to pay, as well as the timing of the customer payments;
•
Wholesale transactions — dealer credit risk and Ford risk, as the receivables owned by the VIEs primarily arise from the financing provided by us to Ford-franchised dealers; therefore, the collections depend upon the sale of Ford vehicles; and
•
Net investment in operating lease transactions — vehicle residual value risk, consumer credit risk and prepayment risk.
As residual interest holder, we are exposed to the underlying residual and credit risk of the collateral, and may be exposed to interest rate risk. However, these risks are not incremental to the exposure we have on the underlying assets. The amount of risk absorbed by our residual interests is generally represented by and limited to the amount of overcollateralization of our assets securing the debt and any cash reserves.
We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default. Securitization investors have no recourse to us or our other assets for credit losses on the securitized assets and have no right to require us to repurchase the investments. Although not contractually required, we regularly support our wholesale securitization programs by repurchasing receivables of a dealer from the VIEs when the dealer’s performance is at risk, which transfers the corresponding risk of loss from the VIE to us. In order to continue to fund the wholesale receivables, we also may contribute additional cash or wholesale receivables if the collateral falls below the required level. The cash contributions were $20 million and zero at March 31, 2010 and December 31, 2009,
respectively, and ranged from zero to $375 million during the first quarter of 2010. In addition, while not contractually required, we may purchase the commercial paper issued by our FCAR asset-backed commercial paper program.
From time to time, we renegotiate the terms of our funding commitments, which may include reallocating the commitments globally. We do not guarantee any asset-backed securities and generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs. However, in certain securitization transactions, we have dynamic enhancements where we are required to support the performance of the securitization transactions by purchasing additional subordinated notes or increasing cash reserves.
VIEs that are exposed to interest rate or currency risk have reduced their exposure by entering into derivatives. In certain instances, we have entered into offsetting derivative transactions with the VIE or the counterparty to protect the VIE from these risks that are not mitigated through derivative transactions between the VIE and its counterparty. See Note 11 for additional information regarding our derivatives.
Refer to Note 5 for information on the financial position and financial performance of our VIEs.
VIEs of which we are not the primary beneficiary
We also have an investment in a joint venture determined to be a VIE of which we are not the primary beneficiary. The joint venture provides consumer and dealer financing in its local markets and is financed by external debt and additional subordinated interest provided by our joint venture partner. The operating agreement indicates that the power to direct economically significant activities is shared with our joint venture partner, and the obligation to absorb losses or rights to receive benefits resides primarily with our joint venture partner. Our investment in the joint venture is accounted for as an equity method investment and is included in Other assets. Our maximum exposure to any potential losses associated with this VIE is limited to our equity investment, and amounted to $64 million and $67 million at March 31, 2010 and December 31,
2009, respectively.
NOTE 7. OTHER ASSETS AND OTHER LIABILITIES AND DEFERRED INCOME
Other assets and other liabilities and deferred income consist of various balance sheet items that are combined for financial statement presentation due to their respective materiality compared with other individual asset and liability items. This footnote provides more information contained within the combined items.
Accrued interest, rents and other non-finance receivables
$
1,092
$
1,070
Deferred charges including unamortized dealer commissions
629
665
Collateral held for resale, at net realizable value
555
624
Restricted cash (a)
383
308
Prepaid reinsurance premiums and other
reinsurance receivables
257
275
Investment in used vehicles held for resale, at net realizable value
190
458
Property and equipment, net of accumulated depreciation of $346 and
$348 at March 31, 2010 and December 31, 2009, respectively
166
177
Investment in non-consolidated affiliates
126
123
Retained interests in securitized assets
13
26
Other
348
374
Total other assets
$
3,759
$
4,100
(a)
Includes cash collateral required to be held against loans with the European Investment Bank as well as cash held to meet certain local governmental and regulatory reserve requirements.
Includes $1,606 million and $1,352 million payable to Ford and affiliated companies in accordance with our intercompany tax sharing agreement at March 31, 2010 and December 31, 2009, respectively.
We have an asset-backed commercial paper program in the United States with qualified institutional investors. We also obtain other short-term funding from the issuance of demand notes to retail investors through our floating rate demand notes program. We have certain asset-backed securitization programs that issue short-term debt securities that are sold to institutional investors. Bank borrowings by several of our international affiliates in the ordinary course of business are an additional source of short-term funding.
We obtain long-term debt funding through the issuance of a variety of unsecured and asset-backed debt securities in the United States and international capital markets. We also sponsor a number of asset-backed securitization programs that issue long-term debt securities that are sold to institutional investors in the United States and international capital markets.
First quarter of 2010 and fourth quarter of 2009 average contractual rates exclude the effects of derivatives and facility fees.
(b)
First quarter of 2010 and fourth quarter of 2009 weighted-average rates include the effects of derivatives and facility fees.
(c)
Obligations issued in securitizations that are payable only out of collections on the underlying securitized assets and related enhancements. Refer to Note 5 for information regarding on-balance sheet securitization transactions.
(d)
The Ford Interest Advantage program consists of our floating rate demand notes.
(e)
Includes debt with affiliated companies as indicated in the table below.
(f)
Adjustments related to designated fair value hedges of unsecured debt.
(g)
Average contractual and weighted-average interest rates for total long-term debt reflect the rates for both notes payable within one year and notes payable after one year.
(h)
Fair value of debt reflects interest accrued but not yet paid of $836 million and $1,074 million at March 31, 2010 and December 31, 2009, respectively. Interest accrued is reported in Other liabilities and deferred income and Accounts payable – Affiliated companies. See Note 10 for fair value methodology.
Debt Repurchases. Through private market transactions, we repurchased an aggregate of $201 million and $272 million principal amount of our outstanding notes in the first quarter of 2010 and 2009, respectively. As a result, we recorded a pre-tax loss of $7 million and a pre-tax gain of $14 million, net of unamortized premiums and discounts, in Other income, net in the first quarter of 2010 and 2009, respectively.
Short-term and long-term debt matures at various dates through 2048. Maturities are as follows (in millions):
2010 (a)
2011(b)
2012
2013
2014
Thereafter (c)
Total
Unsecured debt maturities
$
9,288
$
11,611
$
6,990
$
4,696
$
3,638
$
5,497
$
41,720
Asset-backed debt maturities
24,477
15,801
8,528
2,028
225
1,672
52,731
Unamortized discount (d)
(1
)
(2
)
(180
)
(67
)
(186
)
(38
)
(474
)
Fair value adjustments (d)
3
89
107
46
13
—
258
Total debt maturities
$
33,767
$
27,499
$
15,445
$
6,703
$
3,690
$
7,131
$
94,235
(a)
Includes $13,418 million for short-term and $20,349 million for long-term debt.
(b)
Includes $665 million for short-term and $26,834 million for long-term debt.
(c)
Approximately $4.2 billion of unsecured debt matures between 2015 and 2020 with the remaining balance maturing after 2030.
(d)
Unamortized discount and fair value adjustments are presented based on maturity date of related debt.
The following table summarizes earnings retained for use in the business for the periods ended March 31 (in millions):
First Quarter
2010
2009
Retained earnings, beginning balance
$
4,779
$
4,985
Net income/(loss)
528
(13
)
Distributions
(500
)
(1,054
)
Retained earnings, ending balance
$
4,807
$
3,918
In the first quarter of 2009, a plan was announced to restructure Ford’s debt through a combination of a conversion offer by Ford and tender offers by us. As part of this debt restructuring, we commenced a cash tender offer for Ford’s secured term loan under Ford’s secured credit agreement, pursuant to which we purchased from lenders thereof $2.2 billion principal amount of term loan for an aggregate cost of about $1.1 billion (including transaction costs). This transaction settled on March 27, 2009, following which we distributed the term loan to our immediate parent, Ford Holdings LLC, whereupon it was forgiven. The transaction is reflected in the table above as a $1,054 million distribution, which consists of the fair value of the term loan purchased plus transaction expenses.
Certain assets and liabilities are presented on our financial statements at fair value. Assets and liabilities measured at fair value on a recurring basis on our balance sheet include cash equivalents, marketable securities, derivative financial instruments and retained interests in securitized assets. Assets and liabilities measured at fair value on a recurring basis for disclosure only include finance receivables and debt. The fair value of these items are presented together with the related carrying value in Notes 2 and 8, respectively.
We adopted the FASB’s new accounting standard on fair value measurements on January 1, 2010. The standard requires both new disclosures and clarifies existing disclosures. The standard also requires a greater level of disaggregated information in the fair value hierarchy as well as expands disclosures about valuation techniques and inputs to measure fair value, as defined below.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be based on assumptions that market participants would use, including a consideration of non-performance risk. In determining fair value, we use various valuation methodologies and prioritize the use of observable inputs. We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:
•
Level 1 — inputs include quoted prices for identical instruments and are the most observable.
•
Level 2 — inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves.
•
Level 3 — inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.
For instruments measured using Level 3 inputs, a reconciliation of the beginning and ending balances is disclosed.
Valuation Methodologies
Cash, Cash Equivalents and Marketable Securities. Cash and all highly liquid investments with a maturity of 90 days or less at the date of purchase are classified as Cash and cash equivalents. Investments in securities with a maturity date greater than 90 days at the date of purchase are classified as Marketable securities. Cash on hand, time deposits, certificates of deposit, and money market accounts are reported at par value, which approximates fair value. For other investment securities, we generally measure fair value based on a market approach using prices obtained from pricing services. We review all pricing data for reasonability and observability of inputs. Pricing methodologies and inputs to valuation models used by the pricing services depend on the security type (i.e., asset class). Where possible, fair values are generated using market
inputs including quoted prices (the closing price in an exchange market), bid prices (the price at which a dealer stands ready to purchase) and other market information. For securities that are not actively traded, the pricing services obtain quotes for similar fixed-income securities or utilize matrix pricing, benchmark curves or other factors to determine fair value. In certain cases, when observable pricing data is not available, we estimate the fair value of investment securities based on an income approach using industry standard valuation models and estimates regarding non-performance risk.
Derivative Financial Instruments. Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments based on an income approach using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-performance risk. The adjustment reflects the full credit default swap (“CDS”) spread applied to a net exposure, by counterparty. We use our counterparty’s CDS spread when we are in a net asset position and our own CDS spread when we are in a net liability position.
In certain cases, market data is not available and we use management judgment to develop assumptions which are used to determine fair value. This includes situations for longer-dated instruments where market data is less observable. Also, for interest rate swaps and cross-currency interest rate swaps used in securitization transactions, the notional amount of the swap is based on actual payments on the securitized contracts. We use management judgment to estimate the timing and amount of the swap cash flows based on historical pre-payment speeds.
Retained Interests in Securitized Assets. We estimate the fair value of retained interests based on an income approach using internal valuation models. These models project future cash flows of the monthly collections on the sold finance receivables in excess of amounts needed for payment of the debt and other obligations issued or arising in the securitization transactions. The projected cash flows are discounted to a present value based on market inputs and our own assumptions regarding credit losses, prepayment speed and the discount rate.
Finance Receivables. We generally estimate the fair value of finance receivables based on an income approach using internal valuation models. These models project future cash flows of financing contracts incorporating appropriate funding pricing and enhancement requirements. The projected cash flows are discounted to a present value based on market inputs and our own assumptions regarding credit losses, pre-payment speed and the discount rate. Our assumptions regarding prepayment speed and credit losses are based on historical performance.
Debt. We estimate the fair value of debt based on a market approach using quoted market prices or current market rates for similar debt with approximately the same remaining maturities, where possible. Where market prices are not available, we estimate fair value based on an income approach using discounted cash flow models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, our own credit risk and the contractual terms of the debt instruments. For asset-backed debt issued in securitization transactions, the principal payments are based on the actual payments on the securitized contracts. We use management judgment to estimate the timing and amount of the debt cash flows based on historical pre-payment speeds.
The following tables summarize the fair values by input hierarchy for financial instruments measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009 (in millions):
Excludes $6,566 million of time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value, which approximates fair value. In addition to these cash equivalents, we also had cash on hand totaling $2,041 million.
(b)
Includes certificates of deposits and time deposits with maturities greater than 90 days at the date of purchase.
(c)
See Note 11 for additional information regarding derivative financial instruments.
(d)
Retained interests in securitized assets are reported in Other assets.
Excludes $7,514 million of time deposits, certificates of deposit, money market accounts, and other cash equivalents reported at par value, which approximates fair value. In addition to these cash equivalents, we also had cash on hand totaling $2,789 million.
(b)
Includes certificates of deposits and time deposits with maturities greater than 90 days at the date of purchase.
(c)
See Note 11 for additional information regarding derivative financial instruments.
(d)
Retained interests in securitized assets are reported in Other assets.
Reconciliation of Changes in Level 3 Financial Instrument Balances
The following summarizes the changes in Level 3 financial instruments measured at fair value on a recurring basis for the periods ended March 31 (in millions):
The following summarizes the realized/unrealized gains/(losses) on Level 3 financial instruments by position in the consolidated statement of operations for the periods ended March 31 (in millions):
First Quarter 2010
Other Income,
net
Other
Comprehensive
Income/(Loss) (a)
Total Realized/ Unrealized
Gains/(Losses)
Marketable securities
$
(4
)
$
—
$
(4
)
Derivative financial instruments, net
(66
)
(6
)
(72
)
Retained interests in securitized assets
(2
)
2
0
Total
$
(72
)
$
(4
)
$
(76
)
(a)
Other Comprehensive Income/(Loss) on derivative financial instruments reflects foreign currency translation on non-U.S. dollar affiliates.
First Quarter 2009
Other Income,
net
Other
Comprehensive
Income/(Loss) (a)
Total Realized/
Unrealized
Gains/(Losses)
Marketable securities
$
(4
)
$
0
$
(4
)
Derivative financial instruments, net
(27
)
4
(23
)
Retained interests in securitized assets
4
(2
)
2
Total
$
(27
)
$
2
$
(25
)
(a)
Other Comprehensive Income/(Loss) on derivative financial instruments reflects foreign currency translation on non-U.S. dollar affiliates.
Items Measured at Fair Value on a Nonrecurring Basis
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into various derivative contracts. Interest rate contracts including swaps, caps and floors are used to manage the effects of interest rate fluctuations. Cross-currency interest rate swap contracts are used to manage foreign currency and interest rate exposures on foreign denominated debt. Foreign exchange forward contracts are used to manage foreign exchange exposure. Our
derivatives are over-the-counter customized derivative transactions and are not exchange traded. Management reviews our hedging program, derivative positions, and overall risk management on a regular basis.
We have elected to apply hedge accounting to certain derivatives. Derivatives that receive designated hedge accounting treatment are documented and the relationships are evaluated for effectiveness at the time they are designated, as well as throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting. Regardless of hedge accounting treatment, we only enter into transactions we believe will be highly effective at offsetting the underlying economic risk. Refer to our 2009 10-K Report for a more detailed description of our derivative financial instruments and hedge accounting policies.
Income Effect of Derivative Financial Instruments
The following table summarizes the pre-tax gain/(loss) for each type of hedge designation for the periods ended March 31 (in millions):
Hedge ineffectiveness reflects a $43 million gain and a $1 million gain on derivatives for the first quarter of 2010 and 2009, respectively, and a $45 million loss and $11 million loss on hedged items for the first quarter of 2010 and 2009, respectively.
(b)
Gains/(Losses) related to foreign currency derivatives were substantially offset by net revaluation impacts on foreign denominated debt, which were also recorded in Other income, net.
We report net interest settlements and accruals on fair value hedges (which are excluded from the assessment of hedge effectiveness) in Interest expense. Foreign currency revaluation on accrued interest for fair value hedges was less than $1 million in both the first quarter of 2010 and 2009 and is reported in Other income, net. We report hedge ineffectiveness on fair value hedges in Other income, net. We report all income items on derivatives not designated as hedging instruments in Other income, net.
Total derivatives not designated as hedging instruments
75,965
1,477
1,179
Total derivative financial instruments
$
82,274
$
1,862
$
1,179
(a)
Includes forward contracts between Ford Credit and an affiliated company.
We report derivative assets and derivative liabilities in Derivative financial instruments. To ensure consistency in our treatment of derivative and non-derivative exposures with regard to our master agreements, we do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure.
The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates or foreign currency exchange rates.
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Our adjustment for non-performance risk, relative to a measure based on an unadjusted inter-bank deposit rate (e.g., LIBOR), reduced our derivative assets by $14 million and $6 million, and our derivative liabilities by $13 million and $15 million at March 31, 2010 and December 31, 2009, respectively.
Use of derivatives exposes us to the risk that a counterparty may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have long-term credit ratings of single-A or better. The aggregate fair value of derivative instruments in asset positions on March 31, 2010 is approximately $1.5 billion, representing the maximum loss we would recognize at that date if all counterparties failed to perform as contracted. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be
significantly lower.
See Note 10 for additional information regarding fair value measurements.
We execute divestitures and alternative business arrangements primarily where securitization and other funding availability is limited. Specific actions we have undertaken are presented by segment.
International Segment
Primus Leasing Company Limited. In March 2009, we completed the sale of Primus Leasing Company Limited (“Primus Thailand”), our operation in Thailand that offered automotive retail and wholesale financing of Ford, Mazda and Volvo vehicles. As a result of the sale, Finance receivables, net were reduced by approximately $173 million, and we recognized a de minimis pre-tax gain in Other income, net.
Other income consists of various line items that are combined on the consolidated statement of operations due to their respective materiality compared with other individual income and expense items. This footnote provides more detailed information contained within this item.
The following table summarizes amounts included in Other income, net (in millions):
First Quarter
2010
2009
Interest and investment income
$
18
$
31
Gains/(Losses) on derivatives (a)
(51
)
108
Currency revaluation gains/(losses)
59
(198
)
Investment and other income related to sales of receivables
0
10
Other
70
113
Other income, net
$
96
$
64
(a)
Gains/(Losses) related to foreign currency derivatives are substantially offset by currency revaluation gain/loss impacts on foreign denominated debt. See Note 11 for detail by derivative instrument and risk type.
We continuously monitor and manage the cost structure of our business to remain competitive within the industry. Restructuring charges related to employee separation actions are presented by segment.
North America Segment
In the first quarter of 2010, we announced plans to continue to restructure our U.S. operations to meet changing business conditions, including the decline in our receivables. The reductions will occur in 2010 through attrition, retirements, and involuntary separations. In the first quarter of 2010, we recognized pre-tax charges of $13 million in Operating expenses as a result of these actions.
In the first quarter of 2009, we recognized pre-tax charges of $22 million in Operating expenses for employee separation actions relating to our U.S. restructuring which affected our servicing, sales, and central operations. In the first quarter of 2010, we released $1 million of this reserve.
International Segment
In the first quarter of 2010 and 2009, we recognized pre-tax charges of $2 million and $5 million, respectively, in Operating expenses for employee separation actions primarily in European locations.
We conduct our financing operations directly and indirectly through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. We divide our business segments based on geographic regions: the North America Segment (includes operations in the United States and Canada) and the International Segment (includes operations in all other countries).
We measure the performance of our segments primarily on an income before income taxes basis, after excluding the impact to earnings from gains and losses related to market valuation adjustments to derivatives primarily related to movements in interest rates. These adjustments are included in Unallocated Risk Management and are excluded in assessing our North America and International segment performance, because our risk management activities are carried out on a centralized basis at the corporate level, with only certain elements allocated to these segments. We also adjust segment performance to re-allocate interest expense between the North America and International segments reflecting debt and equity levels proportionate to their product risk. The North America and International segments are presented on a managed basis. Managed basis includes Finance receivables, net and Net investment
in operating leases reported on our consolidated balance sheet, excluding unearned interest supplements related to finance receivables, and receivables we sold in off-balance sheet securitizations and continue to service.
Key operating data for our business segments for the periods ended March 31 were as follows (in millions):
Unallocated/Eliminations
North
America
Segment
International
Segment
Unallocated
Risk
Management
Effect of
Sales of
Receivables
Effect of
Unearned
Interest
Supplements
Total
Total
First Quarter 2010
Revenue (a)
$
2,260
$
563
$
30
$
(7
)
$
—
$
23
$
2,846
Income
Income/(Loss) before income taxes
702
96
30
—
—
30
828
Provision for/(Benefit from) income taxes
256
34
10
—
—
10
300
Income/(Loss) from continuing operations
446
62
20
—
—
20
528
Other disclosures
Depreciation on vehicles subject to operating leases
607
34
—
—
—
—
641
Interest expense
798
330
—
(1
)
—
(1
)
1,127
Provision for credit losses
(54
)
3
—
—
—
—
(51
)
Finance receivables and net investment in operating leases
68,319
21,600
—
(42
)
(1,986
)
(2,028
)
87,891
Total assets
89,491
28,079
—
(29
)
(1,986
)
(2,015
)
115,555
First Quarter 2009
Revenue (a)
$
2,883
$
683
$
(24
)
$
(14
)
$
—
$
(38
)
$
3,528
Income
Income/(Loss) before income taxes
(45
)
33
(24
)
—
—
(24
)
(36
)
Provision for/(Benefit from) income taxes
(27
)
12
(8
)
—
—
(8
)
(23
)
Income/(Loss) from continuing operations
(18
)
21
(16
)
—
—
(16
)
(13
)
Other disclosures
Depreciation on vehicles subject to operating leases
1,357
58
—
—
—
—
1,415
Interest expense
992
434
—
(6
)
—
(6
)
1,420
Provision for credit losses
321
64
—
—
—
—
385
Finance receivables and net investment in operating leases
79,956
25,997
—
(432
)
(1,341
)
(1,773
)
104,180
Total assets
101,283
32,709
—
(344
)
(1,341
)
(1,685
)
132,307
(a)
Total Revenue represents Total financing revenue, Insurance premiums earned, net and Other income, net.
Commitments and contingencies consist primarily of lease commitments, guarantees and indemnifications, and litigation and claims.
The fair values of guarantees and indemnifications issued are recorded in the financial statements and are not material. We have estimated the probability of payment for each guarantee and indemnification to be remote and have not recorded any loss accruals. At March 31, 2010 and December 31, 2009, the following guarantees and indemnifications were issued and outstanding:
Guarantees of certain obligations of unconsolidated and other affiliates. In some cases, we have guaranteed debt and other financial obligations of unconsolidated affiliates, including Ford. Expiration dates vary, and guarantees will terminate on payment and/or cancellation of the obligation. A payment would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from Ford or an affiliate of Ford amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full. The maximum potential payments under these guarantees totaled approximately $171 million and $182 million at March 31, 2010 and December 31, 2009, respectively. Of these
values, $45 million and $49 million at March 31, 2010 and December 31, 2009, respectively, was counter-guaranteed by Ford to us.
FCE Bank plc (“FCE”) has also guaranteed obligations of Ford in Romania of which the maximum potential payment of $520 million has been fully collateralized by cash received from Blue Oval Holdings, a Ford U.K. subsidiary, which is available for use in FCE’s day to day operations, and is recorded as Debt. The expiration dates of the guarantee are August 2010 ($332 million), September 2010 ($33 million) and August 2011 ($155 million) and could terminate on payment and/or cancellation of the obligation by Ford. A payment to the guaranteed party would be triggered by failure of Ford to fulfill its obligation covered by the guarantee.
Guarantees of obligations to Ford. We have guaranteed $127 million and $130 million of third-party obligations payable to Ford Brazil at March 31, 2010 and December 31, 2009, respectively. Payment would be triggered in the event of an unfavorable ruling in a certain lawsuit and the failure of the third parties to repay Ford the obligated amounts. The guarantee will terminate upon the repayment or cancellation of the obligations.
Indemnifications. In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a business. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax and shareholder matters; intellectual property rights; governmental regulations and employment-related matters; other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a third-party claim. We are party to numerous indemnifications and many of these
indemnities do not limit potential payment; therefore, we are unable to estimate a maximum amount of potential future payments that could result from claims made under these indemnities. We regularly evaluate the probability of having to incur costs associated with these indemnifications and have accrued for expected losses that are probable.
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarter 2010 Compared with First Quarter 2009
In the first quarter of 2010, our net income was $528 million, an improvement of $541 million compared with a year ago. On a pre-tax basis, we earned $828 million in the first quarter of 2010, an improvement of $864 million compared with a year ago. The improvement in pre-tax results was more than explained by:
•
Lower residual losses on returned vehicles and lower depreciation expense for leased vehicles due to higher auction values (about $440 million);
•
A lower provision for credit losses primarily related to a lower credit loss reserve and improved charge-off performance (about $440 million);
•
The non-recurrence of net losses related to market valuation adjustments to derivatives, shown as unallocated risk management in the table below ($54 million);
•
Higher financing margin primarily attributable to lower borrowing costs (about $50 million); and
•
Lower operating costs (about $30 million).
These factors were offset partially by:
•
Lower volume primarily related to lower average receivables (about $130 million).
Results of our operations by business segment and unallocated risk management for the first quarter of 2010 and 2009 are shown below:
First Quarter
2010
2009
2010
Over/(Under)
2009
(in millions)
Income/(Loss) before income taxes
North America Segment
$
702
$
(45
)
$
747
International Segment
96
33
63
Unallocated risk management
30
(24
)
54
Income/(Loss) before income taxes
828
(36
)
864
Provision for/(Benefit from) income taxes
300
(23
)
323
Net income/(loss)
$
528
$
(13
)
$
541
The improvement in North America Segment pre-tax results primarily reflected lower residual losses on returned vehicles and lower depreciation expense for leased vehicles due to higher auction values, a lower provision for credit losses, higher financing margin, and lower operating costs. These factors were offset partially by lower volume.
The increase in International Segment pre-tax earnings primarily reflected a lower provision for credit losses, and lower losses on residual based products, offset partially by lower volume.
The change in unallocated risk management reflected the non-recurrence of net losses related to market valuation adjustments to derivatives primarily related to movements in interest rates. For additional information on our unallocated risk management, refer to Note 15 of our Notes to the Financial Statements.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Placement Volume and Financing Share
Total worldwide financing contract placement volumes for new and used vehicles are shown below:
Shown below are our financing shares of new Ford, Lincoln and Mercury brand vehicles sold by dealers in the United States and new Ford brand vehicles sold by dealers in Europe. Also shown below are our wholesale financing shares of new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States, excluding fleet, and of new Ford brand vehicles acquired by dealers in Europe:
First Quarter
United States
2010
2009
Financing share - Ford, Lincoln and Mercury
Retail installment and lease
35%
31%
Wholesale
80
78
Europe
Financing share - Ford
Retail installment and lease
23%
26%
Wholesale
99
99
North America Segment
In the first quarter of 2010, our total contract placement volumes were 192,000, up 37,000 contracts from a year ago. This increase primarily reflected higher sales of new Ford, Lincoln and Mercury vehicles, due to higher U.S. industry volumes and higher Ford, Lincoln and Mercury financing share. Higher Ford, Lincoln and Mercury financing share was primarily explained by changes in Ford’s marketing programs that favored us.
International Segment
In the first quarter of 2010, our total contract placement volumes were 109,000, down 30,000 contracts from a year ago. This decrease primarily reflected the transition of Jaguar, Land Rover, Mazda, and Volvo financing to other finance providers, the non-recurrence of government vehicle scrappage programs in Germany, the transition of Mexico’s retail financing business to another finance provider, and the discontinuation of retail originations in Australia. Lower Ford financing share primarily reflected the non-recurrence of government vehicle scrappage programs in Germany and a planned financing share reduction in Spain.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition
Finance Receivables and Operating Leases
Our finance receivables and operating leases are shown below:
At March 31, 2010 and December 31, 2009, includes finance receivables before allowance for credit losses of $59.8 billion and $64.4 billion, respectively, that have been sold for legal purposes in securitization transactions, but continue to be included in our financial statements. In addition, at March 31, 2010 and December 31, 2009, includes net investment in operating leases before allowance for credit losses of $10.9 billion and $10.4 billion, respectively, that have been included in securitization transactions, but continue to be included in our financial statements. These underlying securitized assets are available only for payment of the debt and other obligations issued or arising in the securitization transactions;
they are not available to pay our other obligations or the claims of our other creditors. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions. For additional information on our securitization transactions, refer to the “Funding” section of Item 2 and Notes 5 and 6 of our Notes to the Financial Statements.
(b)
Includes allowance for credit losses of $1.4 billion and $1.5 billion at March 31, 2010 and December 31, 2009, respectively.
(c)
Includes on-balance sheet receivables, excluding unearned interest supplements related to finance receivables of about $2 billion and $1.9 billion at March 31, 2010 and December 31, 2009, respectively; and includes off-balance sheet retail receivables of about $100 million at December 31, 2009.
(d)
Includes managed receivables and receivables sold in whole-loan sale transactions where we retain no interest, but which we continue to service of about $100 million at March 31, 2010 and December 31, 2009.
Receivables decreased from year-end 2009, primarily reflecting the transition of Jaguar, Land Rover, Mazda, and Volvo financing to other finance providers and lower industry and financing volumes in 2009 and 2010 compared with prior years. At March 31, 2010, the Jaguar, Land Rover, and Mazda financing portfolio represented about 7% of our managed receivables and the Volvo financing portfolio represented about 4% of our managed receivables. These percentages will decline over time.
As of January 1, 2008, Ford began paying interest supplements and residual value support to us at the time we purchase eligible contracts from dealers. The amount of unearned interest supplements for finance receivables was about $2 billion at March 31, 2010, compared with $1.9 billion at December 31, 2009 included in Finance receivables, net and the amount of unearned interest supplements and residual support payments for net investment in operating leases was about $1 billion at March 31, 2010, compared with $1.1 billion at December 31, 2009 included in Other
liabilities and deferred income.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
At March 31, 2010, in the United States and Canada, Ford is obligated to pay us $730 million of interest supplements and $140 million of residual value support payments over the terms of the related finance contracts and operating leases, compared with about $1 billion of interest supplements and $180 million of residual value support at December 31, 2009, in each case for contracts purchased prior to January 1, 2008. The unpaid interest supplements and residual value support payment obligations on these contracts
will continue to decline as the contracts liquidate. For additional information on our finance receivables and net investment in operating leases, refer to Notes 1, 2, and 3 of our Notes to the Financial Statements.
Credit Risk
Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit risk has a significant impact on our business. We actively manage the credit risk of our retail installment and lease and wholesale and dealer loan portfolios to balance our level of risk and return. The allowance for credit losses included on our balance sheet is our estimate of the probable credit losses inherent in receivables and leases at the date of our balance sheet. Consistent with our normal practices and policies, we assess the adequacy of our allowance for credit losses quarterly and regularly evaluate the assumptions and models used in establishing the allowance.
In purchasing retail finance and lease contracts, we use a proprietary scoring system that classifies contracts using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), customer characteristics, and contract characteristics. In addition to our proprietary scoring system, we consider other factors, such as employment history, financial stability, and capacity to pay. As of March 31, 2010, about 5% of the outstanding U.S. retail finance and lease contracts in our serviced portfolio
were classified as high risk at contract inception, about the same as year-end 2009.
Credit Loss Metrics
Worldwide
The following table shows worldwide charge-offs (credit losses, net of recoveries) for the various categories of financing during the periods indicated. The loss-to-receivables ratios, which equal charge-offs on an annualized basis divided by the average amount of receivables outstanding for the period, excluding the allowance for credit losses and unearned interest supplements related to finance receivables, are shown below.
First Quarter
2010
2009
(in millions)
Charge-offs – On-Balance Sheet
Retail installment and lease
$
143
$
309
Wholesale
(5
)
19
Other
(5
)
4
Total charge-offs – on-balance sheet
$
133
$
332
Loss-to-Receivables Ratios – On-Balance Sheet
Retail installment and lease
0.84
%
1.49
%
Wholesale
(0.08
)
0.32
Total loss-to-receivables ratio (including other) – on-balance sheet
0.58
%
1.21
%
Memo:
Total charge-offs – managed (in millions)
$
133
$
335
Total loss-to-receivables ratio (including other) – managed
0.58
%
1.22
%
Most of our charge-offs are related to retail installment sale and lease contracts. Charge-offs depend on the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, the auction price of repossessed vehicles, and other charge-offs. We also incur credit losses on our wholesale loans, but default rates for these receivables historically have been substantially lower than those for retail installment sale and lease contracts.
Charge-offs and loss-to-receivables ratios decreased from a year ago primarily reflecting lower losses in the United States and Europe. Charge-offs in the United States decreased due to lower repossessions, lower severity, and lower wholesale and dealer loan net losses.
33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Ford, Lincoln and Mercury Brand Retail Installment and Operating Lease
The following table shows the credit loss metrics for our Ford, Lincoln and Mercury brand U.S. retail installment sale and operating lease portfolio. This portfolio was 66% of our worldwide on-balance sheet portfolio of retail installment receivables and net investment in operating leases at March 31, 2010. In the first quarter of 2010, on-balance sheet charge-offs were lower compared to the same period a year ago primarily due to lower repossessions, lower severity, and lower other charge-offs. Severity was lower by $2,000 per unit, mainly due to improvements in auction values in the used vehicle market.
First Quarter
2010
2009
On-Balance Sheet
Charge-offs (in millions)
$
95
$
216
Loss-to-receivables ratio
0.91
%
1.68
%
Other Metrics — Serviced
Repossessions (in thousands)
19
25
Repossession ratio (a)
2.77
%
3.00
%
Severity (b)
$
7,300
$
9,300
New bankruptcy filings (in thousands)
10
11
Over-60 day delinquency ratio (c)
0.17
%
0.29
%
Memo:
Charge-offs – managed (in millions)
$
96
$
217
Loss-to-receivables ratio – managed
0.91
%
1.68
%
(a)
Repossessions as a percent of the average number of accounts outstanding during the periods.
(b)
Average loss per disposed repossession.
(c)
Delinquencies are expressed as a percent of the accounts outstanding for non-bankrupt accounts.
Allowance for Credit Losses
Our allowance for credit losses and our allowance for credit losses as a percentage of end-of-period receivables (finance receivables, excluding unearned interest supplements, and net investment in operating leases, excluding the allowance for credit losses) for our on-balance sheet portfolio are shown below. A description of our allowance setting process is provided in the “Critical Accounting Estimates — Allowance for Credit Losses” section of Item 7 of Part II of our 2009 10-K Report.
The allowance for credit losses is estimated using a combination of models and management judgment, and is based on such factors as portfolio quality, historical loss performance, and receivable levels. Our allowance for credit losses has decreased from December 31, 2009 consistent with the decrease in charge-offs and includes about $95 million for management’s judgment regarding higher retail installment and lease repossession assumptions compared with historical trends used in our models. At December 31, 2009, our allowance for credit losses included about $215 million for management’s judgment regarding higher retail installment and lease repossession assumptions and higher wholesale and dealer loan default assumptions.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Residual Risk
We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data. For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates — Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 2009 10-K Report.
North America Retail Operating Lease Experience
We use various statistics to monitor our residual risk:
•
Placement volume measures the number of leases we purchase in a given period;
•
Termination volume measures the number of vehicles for which the lease has ended in the given period; and
•
Return volume reflects the number of vehicles returned to us by customers at lease-end.
The following table shows operating lease placement, termination, and return volumes for our North America Segment, which accounted for 98% of our total investment in operating leases at March 31, 2010:
First Quarter
2010
2009
(in thousands)
Placements
29
20
Terminations
97
84
Returns
72
75
Memo:
Return rates
74
%
89
%
In the first quarter of 2010, placement volumes were up 9,000 units compared with the same period a year ago, primarily reflecting higher industry volumes, higher Ford market share, and changes in Ford’s marketing programs. Termination volumes increased 13,000 units compared with the same period a year ago, reflecting higher placement volumes in 2007 and the first half of 2008. Return volumes decreased 3,000 units compared with the same period a year ago, primarily reflecting lower return rates, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Ford, Lincoln and Mercury Brand Retail Operating Lease Experience
The following table shows return volumes for our Ford, Lincoln and Mercury brand U.S. operating lease portfolio. Also included are auction values at constant first quarter 2010 vehicle mix for lease terms comprising 57% of our active Ford, Lincoln and Mercury brand U.S. operating lease portfolio:
First Quarter
2010
2009
(in thousands)
Returns
24-Month term
16
16
36-Month term
19
22
39-Month/Other term
9
6
Total returns
44
44
Memo:
Return rates
71
%
89
%
Auction Values at Constant First
Quarter 2010 Vehicle Mix
24-Month term
$
18,940
$
17,020
36-Month term
15,285
13,115
In the first quarter of 2010, Ford, Lincoln and Mercury brand U.S. return volumes were equal to the same period a year ago, primarily reflecting higher terminations, offset by a lower return rate, down 18 percentage points to 71%, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase. Auction values at constant first quarter 2010 mix were up $1,920 per unit from year ago levels for vehicles under 24-month leases and up $2,170 per unit for vehicles under 36-month leases, primarily reflecting the overall auction value improvement in the used vehicle market. Auction values, at constant first quarter 2010 mix, improved compared with the fourth quarter of 2009 for vehicles under 24-month and 36-month leases by $380 per unit and $490 per unit, respectively. The year-over-year
improvement in auction values experienced in the first quarter of 2010 is not expected to continue to the same extent through the end of the year.
Credit Ratings
Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the Securities and Exchange Commission (“SEC”):
·
DBRS Limited (“DBRS”);
·
Fitch, Inc. (“Fitch”);
·
Moody’s Investors Service, Inc. (“Moody’s”); and
·
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”).
The following chart summarizes long-term senior unsecured credit ratings, short-term credit ratings, and the outlook assigned to us by these four NRSROs:
NRSRO RATINGS
DBRS
Fitch
Moody’s
S&P
Date
Long-
Term
Short-
Term
Trend
Long-
Term
Short-
Term
Outlook
Long-
Term
Short-
Term
Outlook
Long-
Term**
Short-
Term
Outlook
Dec. 2009
B
R-5
Stable
B
C
Positive
B3
NP
Review
B-
NR
Stable
Jan. 2010
B
R-5
Stable
B+
B
Positive
B3
NP
Review
B-
NR
Stable
Mar. 2010
B (high)
R-4
Positive*
B+
B
Positive
B1
NP
Review
B-
NR
Stable
Apr. 2010
B (high)
R-4
Positive*
BB-
B
Positive
B1
NP
Review
B-
NR
Positive
*
The trend assigned to us by DBRS is positive for the long-term senior unsecured credit rating and stable for the short-term credit rating.
**
S&P assigns FCE Bank plc (“FCE”) a long-term senior unsecured credit rating of B, maintaining a one notch differential versus Ford Credit.
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Funding
Overview
Our funding strategy is to maintain sufficient liquidity to meet short-term funding obligations by having a substantial cash balance and committed funding capacity. Despite recent upgrades to our credit ratings, we remain rated below investment grade. As a result, we continue to rely heavily on securitization funding as this market continues to be more cost effective than unsecured funding and allows us access to a different investor base. We plan to meet a significant portion of our 2010 funding requirements through securitization transactions and access the unsecured debt market on occasion. In addition, we have various alternative business arrangements for select products and markets that reduce our funding requirements while allowing us to support Ford (e.g., our partnering in Brazil for retail financing and FCE’s partnering with various institutions in Europe for full service leasing and retail and wholesale financing). We
are continuing to explore and execute such alternative business arrangements. We also have an application pending for Federal Deposit Insurance Corporation (“FDIC”) and State of Utah approval for an industrial loan corporation (“ILC”) that could provide a limited source of funding.
Much of the negative impact we experienced from the volatility and disruptions in the asset-backed securitization market since August 2007 has subsided. Our access to the public and private funding markets, credit spreads on most transactions, and derivative capacity have improved. Additionally, we have been able to complete unsecured debt issuances and securitization transactions with longer maturities. During 2010, we have completed about $11 billion of funding, including: two unsecured debt issuances, one of which was for a term of ten years; about $800 million of wholesale and retail subordinated notes in the United States, Canada, and Germany; two wholesale securitization transactions eligible under the U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) with terms of three and five years, respectively; a private non-TALF wholesale securitization transaction that also had a term of five years;
and a non-TALF lease securitization transaction.
Compared to year-end 2009, we reduced our committed capacity by $1.5 billion as a result of our lower receivables balance. First quarter of 2010 renewals (about 82% of the $2 billion that came due) and added capacity were more than offset by voluntary terminations of certain excess capacity. About 66% of our $32.3 billion of committed capacity as of March 31, 2010 is up for renewal during the remainder of 2010 and 14% is up for renewal in the second quarter of 2010. Our renewal strategy is to optimize capacity and maintain sufficient liquidity to protect our global funding needs. Most of our asset-backed committed facilities enable us to obtain term funding up to the time that the facilities expire. Any outstanding debt at the maturity of the facilities remains outstanding and is repaid as underlying assets liquidate. Our ability to obtain funding under our committed asset-backed
liquidity programs is subject to having a sufficient amount of assets eligible for these programs, and for certain programs, having the ability to obtain derivatives to manage the interest rate risk. For additional information on our committed capacity programs, refer to the “Liquidity” section of Item 7 of Part II of our 2009 10-K Report.
Our funding plan is subject to risks and uncertainties, many of which are beyond our control, including disruption in the capital markets for the types of asset-backed securities used in our asset-backed funding. Potential impacts of industry events on our ability to access debt and derivatives markets, or renew our committed liquidity programs in sufficient amounts and at competitive rates, represents another risk to our funding plan. As a result, we may need to further reduce the amount of finance receivables and operating leases we purchase or originate, thereby reducing our ongoing profits and adversely affecting our ability to support the sale of Ford vehicles.
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Government-sponsored securitization funding programs helped stabilize the asset-backed securitization market. In the first quarter of 2010, most of our funding was completed in public and private markets without utilizing government-sponsored securitization funding programs.
U.S. Federal Reserve’s Commercial Paper Funding Facility (“CPFF”). The CPFF became operational in October 2008 and purchased unsecured and asset-backed commercial paper from U.S. issuers. In 2008, we registered to sell up to $16 billion from our asset-backed commercial paper program (“FCAR”) to the CPFF. FCAR issued a total of $9 billion of commercial paper to the CPFF in 2009, all of which had matured by September 30, 2009. The CPFF ceased purchasing commercial paper on February 1, 2010.
U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”). TALF began in March 2009 to make credit available by restoring liquidity in the asset-backed securitization market. Under TALF, the Federal Reserve Bank of New York (“FRBNY”) made loans to holders of TALF-eligible asset-backed securities. The loans were equal to the market value of the asset-backed securities less a discount. Interest rates on most TALF loans were 100 basis points over the respective term benchmark rate, and discounts varied according to the assets supporting the asset-backed securities. The TALF program revived the asset-backed securitization market by attracting new investors who purchased asset-backed securities, receiving higher spreads on these securities than the spreads they pay on their loans from FRBNY. As investor demand increased due to the liquidity provided by TALF, spreads generally
narrowed on our issuances and the percentage of non-TALF investors increased. As the spread on certain asset-backed securities fell below the 100 basis point spread on TALF loans, our TALF-eligible asset-backed securities were purchased almost exclusively by non-TALF investors.
The balance of our TALF-eligible asset-backed securities outstanding at year-end 2009 was $8.1 billion. In the first quarter of 2010, we issued $2.3 billion of TALF-eligible wholesale asset-backed securities and amortization totaled about $700 million. The balance of TALF-eligible asset-backed securities outstanding at March 31, 2010 was $9.7 billion. TALF expired in March 2010. The following table summarizes our $12.6 billion of TALF-eligible issuances since program inception including the weighted average spread of the triple-A rated notes over the relevant benchmark rates for securitization transactions:
Date
Issuer
Issuance
Size
Weighted
Average
Spread
(in billions)
(basis points)
Retail Installment
Mar. 2009
Ford Credit Auto Owner Trust 2009-A
$
3.0
295
June 2009
Ford Credit Auto Owner Trust 2009-B
1.9
161
July 2009
Ford Credit Auto Owner Trust 2009-C
1.0
165
Sep. 2009
Ford Credit Auto Owner Trust 2009-D
2.1
83
Wholesale
Oct. 2009
Ford Credit Master Owner Trust 2009-2
$
1.5
155
Jan. 2010
Ford Credit Master Owner Trust 2010-1
1.3
165
Mar. 2010
Ford Credit Master Owner Trust 2010-3
1.0
170
Retail Lease
June 2009
Ford Credit Auto Lease Trust 2009-A
$
0.8
211
European Central Bank (“ECB”) Open Market Operations. FCE is eligible to access liquidity through the ECB’s open market operations program. This program allows eligible counterparties to use eligible assets (including asset-backed securities) as collateral for short-term liquidity. The present term limitation is three months; however, in the past the term has been as long as one year. The funding efficiency of liquidity provided under this program is typically lower than if the asset-backed securities were placed in the public or private markets because the ECB applies its own market valuation to the collateral and a discount to the original face value of the asset-backed securities. The market valuation and discount vary by the term of the asset, asset type, and jurisdiction of the asset. During 2009, FCE used the ECB’s open market operations program to provide additional liquidity at a time
when access to the asset-backed securitization market was limited and costs for such funding were significantly higher than in the past. FCE had about $800 million and $1.8 billion of funding from the ECB relating to asset-backed securities and other marketable securities at March 31, 2010 and December 31, 2009, respectively. FCE has continued to sell notes previously posted as collateral for ECB funding in the secondary markets. These secondary sales have improved FCE’s funding efficiency, demonstrated its market access, and reduced its reliance on government-sponsored programs. We expect FCE’s utilization of the ECB open market operations program to continue to decline.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Funding Portfolio
Our outstanding debt and off-balance sheet securitization transactions were as follows on the dates indicated:
Unsecured long-term debt (including notes payable within one year)
36.5
38.9
Asset-backed long-term debt (including notes payable within one year) (a)
43.6
42.0
Total debt
94.2
96.3
Off-Balance Sheet Securitization Transactions
Securitized off-balance sheet portfolio
0.0
0.1
Retained interest
0.0
0.0
Total off-balance sheet securitization transactions
0.0
0.1
Total debt plus off-balance sheet securitization transactions
$
94.2
$
96.4
Ratios
Securitized funding to managed receivables
59
%
56
%
Short-term debt and notes payable within one year to total debt
45
43
Short-term debt and notes payable within one year to total capitalization
40
39
(a)
Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements.
(b)
The Ford Interest Advantage program consists of our floating rate demand notes.
At March 31, 2010, unsecured long-term debt (including notes payable within one year) was down about $2 billion from year-end 2009, primarily reflecting about $3 billion of debt maturities, repurchases, and calls, offset partially by about $1 billion of new unsecured long-term debt issuance. Remaining unsecured long-term debt maturities were as follows: 2010 — $4 billion; 2011 — $11 billion; 2012 — $7 billion; and the balance thereafter.
At March 31, 2010, asset-backed long-term debt (including notes payable within one year) was up about $2 billion from year-end 2009, reflecting asset-backed long-term debt issuance in excess of amortization.
39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The majority of our securitization transactions are included in our financial statements. We expect our future securitization transactions to be on-balance sheet. We believe on-balance sheet arrangements are more transparent to our investors. Securitized assets are only available to repay the related asset-backed debt and to pay other securitization investors and other participants. These underlying securitized assets are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions. This debt is not our legal obligation or the legal obligation of our other subsidiaries.
The following table shows worldwide cash and cash equivalents and marketable securities, receivables, and related debt by segment and product for our on-balance sheet securitization transactions:
Finance
Receivables
and Net
Investment
in Operating
Leases (b)
Related
Debt
Cash and
Cash
Equivalents
Finance
Receivables
and Net
Investment
in Operating
Leases (b)
Related
Debt
(in billions)
Finance Receivables
North America Segment
Retail installment
$
2.3
$
32.8
$
26.7
$
2.0
$
35.0
$
28.3
Wholesale
0.1
12.2
8.7
0.1
12.6
6.3
Total North America Segment
2.4
45.0
35.4
2.1
47.6
34.6
International Segment
Retail installment
1.6
8.6
6.7
1.4
9.9
7.4
Wholesale
0.4
6.2
3.5
0.4
6.9
4.3
Total International Segment
2.0
14.8
10.2
1.8
16.8
11.7
Total finance receivables
4.4
59.8
45.6
3.9
64.4
46.3
Net investment in operating leases
1.2
10.9
7.1
1.3
10.4
6.6
Total on-balance sheet arrangements
$
5.6
$
70.7
$
52.7
$
5.2
$
74.8
$
52.9
(a)
Included are marketable securities totaling $256 million, which are pledged as collateral in a funding arrangement with the ECB.
(b)
Before allowances for credit losses.
For additional information on our securitization transactions, refer to Notes 5 and 6 of our Notes to the Financial Statements.
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Term Funding Plan
The following table shows our public and private term funding issuances in 2009 and through April 30, 2010, and our planned issuances for full year 2010:
2010
Full Year
Through
2009
Forecast
April 30,
Actual
(in billions)
Public Term Funding
Unsecured
$
3 – 6
$
2
$
5
Securitization Transactions (a)
9 – 14
6
15
Total public term funding
$
12 – 17
$
8
$
20
Private Term Funding (b)
$
7 – 11
$
3
$
11
(a)
Includes public securitization transactions and securitization transactions issued under Rule 144A of the Securities Act of 1933.
(b)
Includes private term debt, securitization transactions, and other term funding; excludes sales to Ford Credit’s on-balance sheet asset-backed commercial paper program (“FCAR”).
Through April 30, 2010, we completed about $8 billion of public term funding transactions, including about $2 billion of retail asset-backed securitization transactions in the United States, Canada, and Europe; about $2 billion of wholesale asset-backed securitization transactions in the United States; about $2 billion of lease asset-backed securitization transactions in the United States; and about $2 billion of unsecured issuances in the United States.
Through April 30, 2010, we completed about $3 billion of private term funding transactions (excluding our on-balance sheet asset-backed commercial paper program), primarily reflecting retail, lease, and wholesale asset-backed securitization transactions in the United States and Canada.
Our funding plan is subject to risks and uncertainties, many of which are beyond our control. If credit markets constrain term securitization funding, we will consider reducing our assets below the low-end of our projected year-end 2010 managed receivables balance (i.e., below $80 billion). For additional information on our projected year-end 2010 managed receivables, refer to the “Outlook” section of Item 2.
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity
We define liquidity as cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) and capacity (which includes capacity in our committed liquidity programs, FCAR program, and credit facilities), less asset-backed capacity in excess of eligible receivables and cash and cash equivalents required to support on-balance sheet securitization transactions. We have multiple sources of liquidity, including committed asset-backed funding capacity.
At March 31, 2010, committed capacity and cash shown above totaled $53 billion, of which $38.4 billion could be utilized (after adjusting for capacity in excess of eligible receivables of $9 billion and cash required to support on-balance sheet securitization transactions of $5.6 billion). At March 31, 2010, $17.3 billion was utilized, leaving $21.1 billion available for use (including $15.1 billion of cash, cash equivalents, and marketable securities, but excluding marketable securities related to insurance activities, and cash, cash equivalents, and marketable securities to support on-balance sheet securitization transactions).
At March 31, 2010, our liquidity available for use was about the same as year-end 2009. Liquidity available for use was 23% of managed receivables, compared with 22% at year-end 2009. In addition to the $21.1 billion of liquidity available for use, the $9 billion of capacity in excess of eligible receivables provides us with an alternative for funding future purchases or originations and gives us flexibility to shift capacity to alternate markets and asset-classes.
Cash, Cash Equivalents, and Marketable Securities. At March 31, 2010, our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) totaled $20.7 billion, compared with $17.3 billion at year-end 2009. In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs. These excess amounts are maintained primarily as highly liquid investments, which provide liquidity for our short-term funding needs and give us flexibility in the use of our other funding programs. Our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) primarily include federal agency securities, bank time deposits with investment grade institutions, A-1/P-1 (or higher) rated commercial paper, U.S. Treasury
bills, and money market funds that invest primarily in federal agency securities, U.S. Treasury bills, and other short-term investment grade securities. The average maturity of these investments is typically less than 90 days and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Cash, cash equivalents, and marketable securities include amounts to be used only to support our on-balance sheet securitization transactions of $5.6 billion at March 31, 2010 and $5.2 billion at December 31, 2009.
Committed Liquidity Programs. We and our subsidiaries, including FCE, have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits (“conduits”) and other financial institutions whereby such parties are contractually committed, at our option, to purchase from us eligible retail or wholesale assets or to purchase or make advances under asset-backed securities backed by retail, lease or wholesale assets for proceeds of up to $22 billion at April 1, 2010 ($9.9 billion retail, $8.5 billion wholesale and $3.6 billion supported by various retail, lease or wholesale assets) of which about $7 billion are commitments to FCE. These committed liquidity programs have varying maturity dates, with $18.2 billion
having maturities within the next twelve months (of which $6.2 billion relates to FCE commitments), and the remaining balance having maturities between September 2011 and March 2013. We plan to achieve capacity renewals consistent with our lower receivables balance and to optimize capacity and maintain sufficient liquidity to protect our global funding needs. Our ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain interest rate hedging arrangements for certain securitization transactions. Our capacity in excess of eligible receivables would protect us against the risk of lower than planned renewal rates. At March 31, 2010, $10.2 billion of these commitments were in use. These programs are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum
net worth requirements), and credit rating triggers that could limit our ability to obtain funding. However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels. Based on our experience and knowledge as servicer of the related assets, we do not expect any of these programs to be terminated due to such events.
42
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Credit Facilities
Our credit facilities and asset-backed commercial paper lines were as follows on the dates indicated:
At March 31, 2010, we and our majority-owned subsidiaries, including FCE, had $1.2 billion of contractually-committed unsecured credit facilities with financial institutions, of which $625 million were available for use. Of the credit facilities available for use, $308 million expire in 2010, $260 million expire in 2011, and $57 million expire in 2012. Of the $1.2 billion of contractually-committed credit facilities, almost all are FCE worldwide credit facilities. The FCE worldwide credit facilities may be used, at FCE’s option, by any of FCE’s direct or indirect, majority-owned subsidiaries. FCE will guarantee any such borrowings. All of the worldwide credit facilities are free of material adverse
change clauses, restrictive financial covenants, and credit rating triggers that could limit our ability to obtain funding.
In addition, at March 31, 2010, we had $9.1 billion of contractually-committed liquidity facilities provided by banks to support our FCAR program. Of the $9.1 billion of contractually-committed liquidity facilities, $4.4 billion expire in 2010 and $4.7 billion expire in 2012. Utilization of these facilities is subject to conditions specific to the FCAR program and our having a sufficient amount of eligible assets for securitization. The FCAR program must be supported by liquidity facilities equal to at least 100% of its outstanding balance. At March 31, 2010, $9.1 billion of FCAR’s bank liquidity facilities were available to support FCAR’s asset-backed commercial paper, subordinated debt, or FCAR’s purchase of our asset-backed securities. At March 31, 2010, the outstanding
commercial paper balance for the FCAR program was $6.5 billion.
Liquidity Risks
Refer to the “Liquidity” section of Item 7 of Part II of our 2009 10-K Report for a list of factors that could affect our liquidity.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements (off-balance sheet securitization transactions and whole-loan sale transactions, excluding sales of businesses and liquidating portfolios) since the first quarter of 2007, which is consistent with our plan to execute on-balance sheet securitization transactions. For additional information on our off-balance sheet arrangements, refer to Notes 5 and 7 of our Notes to the Financial Statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Leverage
We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for retail, wholesale, and lease financing, and assessing our capital structure. We refer to our shareholder’s interest as equity. We calculate leverage on a financial statement basis and on a managed basis using the following formulas:
Financial
Statement
Leverage
=
Total Debt
Equity
Retained
Interest in
Securitized
Securitized
Cash,
Adjustments for
Off-balance
Off-balance
Cash Equivalents
Derivative
Sheet
Sheet
and Marketable
Accounting
Managed Leverage
=
Total Debt
+
Receivables
-
Receivables
Equity
-
-
Securities (a)
Adjustments for
-
on Total Debt (b)
Derivative
Accounting
on Equity (b)
(a)
Excludes marketable securities related to insurance activities.
(b)
Primarily related to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
The following table shows the calculation of our financial statement leverage (in billions, except for ratios):
Retained interest in securitized off-balance sheet receivables
0.0
0.0
Adjustments for cash, cash equivalents, and marketable securities (a)
(20.7
)
(17.3
)
Adjustments for derivative accounting (b)
(0.2
)
(0.2
)
Total adjusted debt
$
73.3
$
78.9
Equity
$
10.8
$
11.0
Adjustments for derivative accounting (b)
(0.1
)
(0.2
)
Total adjusted equity
$
10.7
$
10.8
Managed leverage (to 1)
6.9
7.3
(a)
Excludes marketable securities related to insurance activities.
(b)
Primarily related to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
We plan our managed leverage by considering prevailing market conditions and the risk characteristics of our business. At March 31, 2010, our managed leverage was 6.9 to 1, compared with 7.3 to 1 at December 31, 2009. Our managed leverage is significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support Agreement with Ford. In the first quarter of 2010, we paid a cash distribution of $500 million to our parent, Ford Holdings, LLC. For additional information on our planned distributions, refer to the “Outlook” section of Item 2.
44
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Outlook
We now expect full-year 2010 profits to be about the same as our 2009 profits. The recent improvements in used vehicle auction values and credit loss performance are expected to offset the effects of lower average receivables and the non-recurrence of certain favorable 2009 factors. At year-end 2010, we anticipate managed receivables to be in the range of $80 billion to $90 billion. Subject to our funding plan risks previously described in the “Funding – Overview” section, we expect that a significant portion of our funding will consist of securitization transactions and expect the funding structure required for this level of managed receivables at year-end 2010 to be the following (in billions, except for percentages):
Cash, cash equivalents, and marketable securities*
(15
)
–
(18
)
Total funding structure
$
80
–
90
Memo:
Securitized funding as a percentage of managed receivables
55
–
60
%
* Excludes marketable securities related to insurance activities.
We expect to pay distributions of about $2 billion in 2010 (up from $1.5 billion projected previously), including the first quarter cash distribution of $500 million. We will continue to assess our ability to make future distributions based on our available liquidity and managed leverage objectives.
45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Statements included or incorporated by reference herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including, without limitation:
Automotive Related:
•
Further declines in industry sales volume, particularly in the United States or Europe, due to financial crisis, deepening recession, geo-political events or other factors;
•
Decline in Ford’s market share;
•
Continued or increased price competition for Ford vehicles resulting from industry overcapacity, currency fluctuations or other factors;
•
An increase in or acceleration of market shift beyond Ford’s current planning assumptions from sales of trucks, medium- and large-sized utilities, or other more profitable vehicles, particularly in the United States;
•
A return to elevated gasoline prices, as well as the potential for volatile prices or reduced availability;
•
Lower-than-anticipated market acceptance of new or existing Ford products;
•
Adverse effects from the bankruptcy, insolvency, or government-funded restructuring of, change in ownership or control of, or alliances entered into by a major competitor;
•
Economic distress of suppliers may require Ford to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase Ford’s costs, affect Ford’s liquidity, or cause production disruptions;
•
Work stoppages at Ford or supplier facilities or other interruptions of production;
•
Single-source supply of components or materials;
•
Restriction on use of tax attributes from tax law “ownership change”;
•
The discovery of defects in Ford vehicles resulting in delays in new model launches, recall campaigns or increased warranty costs;
•
Increased safety, emissions, fuel economy or other regulation resulting in higher costs, cash expenditures and/or sales restrictions;
•
Unusual or significant litigation or governmental investigations arising out of alleged defects in Ford products, perceived environmental impacts, or otherwise;
•
A change in Ford’s requirements for parts or materials where it has entered into long-term supply arrangements that commit it to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to the seller (“take-or-pay contracts”);
•
Adverse effects on Ford’s results from a decrease in or cessation of government incentives related to capital investments;
•
Adverse effects on Ford’s operations resulting from certain geo-political or other events;
•
Substantial levels of indebtedness adversely affecting Ford’s financial condition or preventing Ford from fulfilling its debt obligations (which may grow because Ford is able to incur substantially more debt, including additional secured debt);
•
Inability of Ford to implement its One Ford plan;
Ford Credit Related:
•
A prolonged disruption of the debt and securitization markets;
•
Inability to access debt, securitization or derivative markets around the world at competitive rates or in sufficient amounts due to credit rating downgrades, market volatility, market disruption or otherwise;
•
Inability to obtain competitive funding;
•
Higher-than-expected credit losses;
•
Adverse effects from the government-supported restructuring of, change in ownership or control of, or alliances entered into by a major competitor;
•
Increased competition from banks or other financial institutions seeking to increase their share of retail installment financing Ford vehicles;
•
Collection and servicing problems related to our finance receivables and net investment in operating leases;
•
Lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles;
•
New or increased credit, consumer or data protection or other laws and regulations resulting in higher costs and/or additional financing restrictions;
•
Changes in Ford’s operations or changes in Ford’s marketing programs could result in a decline in our financing volumes;
46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
General:
•
Fluctuations in foreign currency exchange rates and interest rates;
•
Failure of financial institutions to fulfill commitments under committed credit and liquidity facilities;
•
Labor or other constraints on Ford’s or our ability to restructure its or our business;
•
Substantial pension and postretirement healthcare and life insurance liabilities impairing Ford’s or our liquidity or financial condition; and
•
Worse-than-assumed economic and demographic experience for postretirement benefit plans (e.g., discount rates or investment returns).
We cannot be certain that any expectations, forecasts, or assumptions made by management in preparing these forward-looking statements will prove accurate, or that any projections will be realized. It is to be expected that there may be differences between projected and actual results. Our forward-looking statements speak only as of the date of their initial issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. For additional discussion of these risk factors, see Item 1A of Part I of our 2009 10-K Report and Item 1A of Part I of Ford’s 2009 10-K Report.
Other Financial Information
With respect to the unaudited financial information of Ford Motor Credit Company as of March 31, 2010 and for the three-month periods ended March 31, 2010 and 2009, included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 7, 2010 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the
review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In our 2009 10-K Report, we discuss in greater detail our market risk, counter-party risk, credit risk, residual risk, liquidity risk, and operating risk.
To provide a quantitative measure of the sensitivity of our pre-tax cash flow to changes in interest rates, we use interest rate scenarios that assume a hypothetical, instantaneous change in interest rates of 100 basis points (or 1%) across all maturities, as well as a base case that assumes that interest rates remain constant at existing levels. These interest rate scenarios are purely hypothetical and do not represent our view of future interest rate movements. The differences in pre-tax cash flow between these scenarios and the base case over a twelve-month period represent an estimate of the sensitivity of our pre-tax cash flow. Under this model, we estimate that at March 31, 2010, all else constant, such an increase in interest rates would increase our pre-tax cash flow by $23 million over the next twelve months, compared with $27 million at December 31, 2009. The
sensitivity analysis presented above assumes a one-percentage point interest rate change to the yield curve that is both instantaneous and parallel. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in our analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Michael E. Bannister, our Chairman of the Board and Chief Executive Officer (“CEO”), and Kenneth R. Kent, our Vice Chairman, Chief Financial Officer (“CFO”) and Treasurer, have performed an evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15 (e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2010 and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and such information
is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
48
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
We have none to report.
ITEM 6. EXHIBITS
Exhibits: please refer to the Exhibit Index on page 52.
Instruments defining the rights of holders of certain issues of long-term debt of Ford Credit have not been filed as exhibits to this Report because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Ford Credit. Ford Credit will furnish a copy of each such instrument to the SEC upon request.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Ford Motor Credit Company LLC:
We have reviewed the accompanying consolidated balance sheet of Ford Motor Credit Company LLC and its subsidiaries (the “Company”) as of March 31, 2010, and the related consolidated statement of operations and consolidated statement of comprehensive income for the three-month periods ended March 31, 2010 and 2009, and the consolidated statement of cash flows for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of operations, of shareholder's interest/equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 25, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2009, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
Items 2 - 4 of Part I and Items 1, 2
and 5 of Part II of Ford Motor
Company’s Quarterly Report on
Form 10-Q for the quarterly period
ended March 31, 2010